Economists and public debt

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Belatedly, thanks to site crises, I’m linking to Nicholas Gruen, who organised this article in Wednesday’s Fin, signed by 21 prominent economists from across the political spectrum (text over the fold).

Combined with the good GDP number released the same day (I discussed it at Crooked Timber , this letter does as Peter Martin says, leave the opposition looking naked. They haven’t really offered any analysis to justify their opposition to economic stimulus, and unless the rest of the year brings really bad economic news, it’s hard to see them recovering any credibility on economic issues. Unsurprisingly, the government ran with it in Parliament , and the best Joe Hockey could do in response was to sneer at Bernie Fraser.


In Paul Krugman’s words, right now, “knowledge is our only defence against catastrophe”. A natural reaction would be to retreat into timidity. But that would repeat mistakes that exacerbated the Great Depression by giving in to our fears and phobias. IMF Chief Economist Olivier Blanchard has a similarly blunt message. “Above all, adopt clear policies and act decisively. Do too much rather than too little.”

Of course other things being equal it’s better for governments to be debt free. But as any homebuyer knows, debt can help us build assets now that we couldn’t otherwise afford, and repay the costs when the assets bear fruit. Australia entered this crisis relatively well placed to weather the storm. In addition to the recent mineral boom, for twenty five years Australian governments have consistently stressed fiscal responsibility and taken large political risks doing what they thought right for Australia, for instance with tax reform and fiscal austerity during the mid 1980s and again in the mid to late 1990s.

Many developed countries were already running cash deficits and had substantial public debt before the financial crisis. However all of them have accepted one lesson of the Great Depression – that during a downturn we should let the ‘automatic stabilisers’ work by loosening budgets temporarily as revenue falls and outlays on welfare relief increase.

Given Australia’s relatively stronger balance sheet, it’s been in a better position to engineer additional discretionary fiscal stimulus than most comparable countries. Cash handouts of nearly two percent of GDP are being paid to middle and lower income Australians. There is no more effective way to stimulate the economy quickly. The success of this measure can be seen in the relative strength of Australian retail sales compared with almost any of our peers. In addition the Government plans to spend many billions more on infrastructure.

All this has converted a sizable expected cash surplus next financial year into a deficit of nearly 5 percent of GDP. This compares with the average of our peers of nearly 9 percent. On current Treasury projections, which seem as plausible as any (though like all such forecasts, they are only ‘best guesses’), net debt will stay below 14 percent of GDP compared with an average of over five times this in comparable countries which nevertheless retain their creditworthiness in capital markets. Ultimately if other countries run weaker balance sheets than us, that’s no reason to relax our own standards. But the comparison does provide some context. It illustrates that even after the stimulus, we remain within a very healthy margin of safety in our Government’s reputation for economic prudence.

None of this is to suggest that Australia should rest on its laurels. There’s a fair chance (but no more than that) that our economy will recover strongly within two years. But just as we don’t know today how far or fast interest rates should be increased then, we don’t know today precisely how fast we should be returning towards budget surplus then. So these debates need to go on and there will come a time when we need to change direction, from supporting economic growth to restraining it, perhaps with great vigour. But that time is certainly not now.

Further, as Australia’s population and infrastructure needs grow, Australians must decide whether they prefer a balance sheet more suited to genteel decline or one that supports investment, dynamism and growth. In addition to building genuinely valuable assets in R&D and carbon abatement, our education, health and transport systems and housing stock, the stimulus will, in Treasury’s words keep up to 210,000 Australians in work who would otherwise be out of jobs. Major infrastructure projects should also pass independent and transparent benefit/cost assessment.

Deploying our strong balance sheet to use otherwise idle resources – or to put it more compellingly, deserted factories and unemployed workers – to build assets that improve our lives and our economy in the future, seems much more appealing; much more commonsensical than retreating into phobias.

Fred Argy, Former Head of EPAC.
Paul Binsted, Company Director and Economist
Tony Cole, Former Secretary to the Treasury
Max Corden, Emeritus Professor, Johns Hopkins University
Owen Covick, Associate Professor, Flinders University
Steve Dowrick, Professor of Economics, ANU
Saul Eslake, Chief Economist, ANZ Bank
John Foster, Professor of Economics, University of Queensland
Bernie Fraser, Former Governor of the Reserve Bank of Australia and Secretary to the Treasury
John Freebairn, Professor of Economics, University of Melbourne
Joshua Gans, Professor of Economics, Melbourne University
Paul J. Gollan, Associate Professor, Macquarie University
Roy Green, Professor, Dean, Faculty of Business, University of Technology, Sydney
Stephen Grenville, Former Deputy Governor, Reserve Bank of Australia
Nicholas Gruen, CEO, Lateral Economics
Tony Harris, Former Auditor General of NSW
Stephen Koukoulas, Global Strategist, TD Securities
Andrew Leigh, Professor of Economics, ANU
John Quiggin, Professor and ARC Federation Fellow, University of Qld
Mike Waller, Former Chief Economist, BHP Billiton
Glenn Withers, Adjunct Professor, Australian National University

82 thoughts on “Economists and public debt

  1. Sorry, ABOM – FRB does nothing other than allow the short term savings of everyone bo be used for productive purposes. Without that most of the deposits of most people in every bank will just attract more fees than they currently do and not pay any interest at all.
    I am not sure even Alice would be happy with that.

  2. Alice #17 –

    I have obviously failed to adequately explain what I mean so I will give you a practical example. The UK Government has recently put income taxes up to 50p on the Pound for incomes above £150,000. What happened? It has made a huge commission for bankers, accountants and lawyers because people are now moving away from declaring an income towards declaring a return on asset and getting that taxed at the capital gains rate of 18%.

    You have failed to grasp the central point – one tax in itself is not sufficient. That is why Lord Lawson reduced the top rate to 40p to match it with capital gains. It was comparatively competitive for both employees of companies as well as the entrepreneurs who found new firms. It meant less liklihood of moving offshore to reduce/avoid tax or use dummy corporations as a form of transfer pricing.

    You view inequality as a relative term. France is more equal than Britain but it has a stubbornly high unemployment rate, horrendously low levels of inward investment and new corporation start-up rates (that has recently changed this year with a new law being passed to offer incentives for people to create companies). That is what I reject your argument of a correlation between income taxes and private sector investment – it is larger than that and must incorporate income, corporate, and capital gains taxes. I reject your argument, not agree with it.

    You think that I have paradoxically accepted your view that lower taxes does not lead to greater wealth while also wanting lower taxes and deregulation. It is a weird argument because I have said that unless we look at this realistically and take tax as a whole into the equation then it is a false argument. But for some reason you want false arguments.

  3. Andie,

    “FRB does nothing other than allow the short term savings of everyone bo be used for productive purposes.”

    Err…no…Andie, I respectfully disagree.

    As Murray Rothbard, Ellen Hodgson Brown, Michael Rowbotham, Antal E Fekete and others have written, it’s nothing of the sort.

    It’s actually a form of monetary embezzlement very similar to a simple Ponzi or Pyramid scheme, allowing potentially infinite inflation in the broad money supply, enriching the “insiders” and impoverishing the general populace by turning them into desperate wage slaves, prostituting themselves and their principles and morality for “precious” paper $$$s.

    For simple minds who don’t feel “comfortable” with big words and abstract ideas (or basic morality), perhaps a colourful cartoon will get it through your thic…sorry…non-receptive…head:

  4. Has anyone noticed there are a string of very weird posts under “framing nationalization”? I cant work out if its some sort of “moving forward to the future (or back to the surrealists)”.. poetry competition or is it just some generally disruptive souls??

  5. Rothbard – ya gotta love him. Pity he got most so right and this so wrong.
    .
    FRB is nothing like a Ponzi scheme, ABOM. A ponzi scheme, by definition, has no (or little) income other than incoming deposits. A bank has a clear, identified, income stream – the interest income from lending.
    They are completely different. Wrong again.

  6. Longer reason, ABOM. If a government were silly enough (and had the power to) ban FRB then a person going to the bank would have two options – go for a call account (however defined) that (because FRB is banned) pays no interest, as it cannot be lent out. To cover its costs for holding the funds and allowing them to be withdrawn on demand (i.e. employing staff) providing security etc. the bank would have to charge fees – larger ones than they do now as this type of deposit provides no income stream.
    The other choice would be to put it on “term” (again, however defined) deposit – this would then be able to be lent out, meaning that the person would lose access to the funds an would therefore not be able to break the term deposit.
    Most consumer deposits are of the demand type, ABOM. People like the convenience of having their funds available. Your way would just have them paying more fees for lower convenience and still not providing total security.
    Thanks, ABOM. More fees to the bankers and less interest paid out.

  7. Anyway – Andrew Im so glad you are thinking about me.”I am not sure even Alice would be happy with that.”

    I really dont mind if banks have a lot more controls placed on them. I dont mind tighter credit regulations. I wouldnt mind seeing the fraction they can lend reduced (severely compared to now – maybe to 50%). I dont care about interest as much as I care about having less asset price inflation and financial stability (shares, houses for the young etc). I dont mind if people have to save up more to prove their credit worthiness. It would reduce household debt, encourage savings, and restrain reckless credit card borrowing. It would also make banks think twice before they send the reps out to offer credit to uncredit worthy borrowers…and they were doing a lot of that. You couldnt clear out your mailbox without getting an offer of more and more credit and more credit in the past ten years – even to very young people with no history at all.

    Im not saying no FRB. Im suggesting a half way measure. Less interest is a very small loss (interest is piddling anyway) compared to more stability in the financial system. Why did they ever deregulate banks and let them go global? Big mistake. Banks need regulation to stop them gambling like drunken sailors every time the economy picks up. They are not “real production.” They are meant to help “real production” and make a modest profit from doing so….not to hype up the markets the way they have been doing. I still maintain the problem at the source is manadatory super though…its been force feeding and inflaming speculatively creative, but ultimately destructive, financial innovation (and motre volatility in the financial system ie procyclical).

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